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Chapter 1
Capital Budgeting: Financial Appraisal of Investment Projects
Welcome to the Power Point Presentation
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Introduction
• Chapter 1 introduces the concept of capital budgeting, and sets out the structure of the book.
• The important points are:
Capital budgeting is the most significant financial activity of the firm.
Capital budgeting determines the core activities of the firm over a long term future.
Capital budgeting decisions must be made carefully and rationally. 2
Capital Budgeting Within The Firm Th e Po sition of Ca pital B u dge tin g
F inancial G oa l of the F irm : W ealth M a xim isatio n
Investm ent D ecison F inancing D ecision D ividend D ecision
L o n g T e rm A sse ts S h o rt T e rm A sse ts D e b t/E qu ity M ix D ivid en d P a yo ut R a tio
C apital B u d geting
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Examples of ‘Long Term Assets’
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Aspects of Capital Budgeting Capital Budgeting involves:
Committing significant resources. Planning for the long term: 5 to 50 years.
Decision making by senior management. Forecasting long term cash flows.
Estimating long term discount rates.
Analyzing risk.
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